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More smartphones, lower margins

November 3, 2009 1:16am
by Richard Waters

It’s been apparent for some time that the spate of touch-screen smartphones now hitting the market will dent profit margins in the hottest part of the mobile business, but Wall Street seems only now to be digesting that fact.

The slumping share prices of Research in Motion and Palm over the past fortnight make this case eloquently. Two weeks ago, not coincidentally, was the weekend that Verizon began its guerrilla marketing campaign for Motorola’s Droid (see Chris Nuttall’s first impressions last week). Since then, Palm’s stock is off 35 per cent and RIM is down 20 per cent, while Motorola is up.

It’s clearly ridiculous to think that one handset can cause this much damage: what is sinking in are the implications of the much bigger wave of competition that is about to hit.

As Sanjay Jha, co-CEO at Motorola, said when I spoke to him last week, more smartphones will lead to lower profit margins for everyone. Motorola is moving into this market as it scraps other far less profitable handsets, so it can contemplate this with a certain equanimity. But others are starting to feel the chill.

The consumer world is where this will hit first - and that is where RIM has turned for an increasingly important part of its growth. With competition for consumers rising, Citi downgraded RIM to a “sell” today.

Palm has its own new consumer play: the $99 Pixi, due to launch later this month.

The sight of a low-priced device from Palm inevitably stirs memories of the Centro, a smartphone that sold well but was blamed for cannibalising sales of the more expensive Treo. Could the Centro do the same thing to the Pre?

Michael Gartenberg, one of the more bullish industry analysts on Palm, doesn’t think so. He pointed out that it was not the success of the Centro that hurt the company before. Rather, it was the fact that the Treo itself had pretty much outlived its usefulness by the time the Centro came along. As long as Palm gets its market segmentation right and can differentiate the two, the Pre should do just fine.

So far, the Pre hasn’t set the world on fire. The 800,000 or so units sold in the last quarter represent a modest - very modest - success (Palm doesn’t break its sales out by product, but virtually all of its smartphone sales now come from the Pre).  Though to be fair to Palm, it’s too early to pass final judgment: pulling in Verizon or other big distribution partners would change things dramatically.

But even if other mobile companies line up behind its new handsets, Palm will still have to deal with the realities of rising competition: pressure on prices and carriers who can drive a harder bargain on subsidies.

Note that Apple has been immune to the market reassessment that has hit Palm and Rim. It is still being given the benefit of the doubt. That will last for as long as it can find a way to hit very high consumer expectations for future advances in its products.

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November 3, 2009 1:16am in Mobile, Tech | Comment

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